Will Wilkinson has the scoop. NotSneaky writes:
Bottom line is that most of the so called “gains from remittances” are
straight up gains from IMMIGRATION. Or in other words, they are gains
from the fact that some person from a poor household in a poor county
has managed to make their way to a rich country and now has a richer
income. Strictly speaking the gain from remittances is just the gain
from INTER-HOUSEHOLD reallocation of income between the migrant and
those who stay behind, not the overall increase in household income due
to migration.
This is oh so tricky and of course we must refer back to the 1920s debates on the "transfer problem," involving Keynes, Ohlin, and others, so ably surveyed by Jacob Viner’s Studies in the Theory of International Trade.
Let’s say a Mexican in Texas sends pesos in his pocket back home. His family benefits and he gets the warm glow but for the nation as a whole that’s just inflation and a redistribution of wealth. How about if he sends dollars back home? Well, he converts through pesos, the real Mexican exchange rate appreciates, and Mexican exporters are penalized, to some extent offsetting the family gains.
How different are the two cases? Ha! That would make a nice exam question.
Does it matter if the receiving family plans to spend the money on imports or does that not matter? Does it matter if the big hotels in Cancun — tourism is Mexico’s largest export sector — are foreign-owned? The clock is ticking…
Ultimately NotSneaky has the correct intuition that the gains are to be found in the immigration itself, not the subsequent transfer. Beware double counting. Here is my previous post on remittances but please note the comments on this post are for remittance talk, not a general discussion of immigration.
And how do remittances differ from foreign aid? As far as I can see, the same questions arise in both cases. Give a country $100m …
Yes, remittances and aid should be spent on imports.
Jonathan Eaton has a good chapter on foreign capital flows in the Handbook of Development Economics.
Working in Mexico I can say that the net gains from remittances differs widely based on the location of the family. On a puebloe the money is almost certainly spent on local goods (even this is becoming increasingly less true). If the family lives in a more urban environment then the remittances could be spent on imports, or exports. /threadjack No companies from the US ship through Tijuana anymore. It is presently cheaper for me to send shipments from sacramento through laredo (by almost 60 percent) then through the much closer border entrance point. From what Ive been told this is do to rampant theft along the tijuana route.
1) A mexican in texas with pesos in his pocket? Where did the pesos come from?
American wages? that would be in $. Carried with him from Mexico? Then they were already part of the mexican money supply. Whether he mails them home or carries them back will have 0 effect. Either he or a member of his family will spend or save them. The inflation already occured when the pesos were printed. The pesos were already in the family’s possession. If the family is the basic unit then there is no change. If the individuals making up the family are the basic unit then the change is which pocket the pesos reside in within the family.
No wealth was redistributed between families or among families.
2) A person in Texas sends dollars to a person in Mexico. Why? Are dollars legal tender in Mexico? Which party can obtain the better legal exchange rate?
If one can obtain more pesos for a dollar in Mexico than one can in the USA, then by all means send the dollars. If the better exchange rate is found in the USA then change the dollars here and send pesos.
If Central Bank officials have rational expectations, then they should foresee the inflationary effects of remittances, adjust and issue less local currency. In that case, what seems to be changing is who gets the seignorage.
I know its probably more complicated than this… but the story above seems to be assuming naive central bankers…
There are cases from India where the remittences were used to buy lands, real estate, education, start hotels, industries, businesses etc which stimulated the economy. In some places like coastal A.P. that I enquired, many people (not the government) attributed the take off mostly to remittences from USA.
This post makes me happy I just finished my micro comprehensive exam a few weeks ago. No more ticking clock
Mike Sproul: If by writing “money backed by assets of central bank” you mean the pesos are to be redeemable on demand in dollars (like, say, US treasury bills could at one time be exchanged for gold), then the exchange would not be inflationary. However, I think that sort of central banking is vanishingly rare nowadays. When a central bank prints pesos to buy dollars which it will not sell back for pesos at par… that is inflationary.
Mike Sproul: We may soon see a major central bank without assets
as the US Federal Reserve appears to be close to divesting its assets (chiefly US Treasury securities) by loaning them, without other security, at close to par for mortgage-backed securities and so-forth which the market– for good reasons– values at much less! Even in normal times the Fed’s assets are a tiny fraction of the value of dollar currency in circulation and the value of dollars is not determined by the value of Fed assets. Furthermore, only the government and its cronies have any access to those assets.
Anyway, I still think you’re confusing propaganda for reality. Consider: if I fire up my desktop publishing software and trusty color laser printer to whip out some “banknotes,” then offer to trade them to you in return for dollars (with no promise to redeem, so they aren’t just IOU’s for a loan), you’re gonna laugh until your sides hurt. The only advantage the (typical modern) peso issuing central bank has over me is that its newly-printed pesos resemble those already accepted as currency in the real economy, and legal-tender laws along with banking regulations coerce most people in the real economy to accept those pesos as money. Of course, by issuing more pesos, the central bank dilutes the value of those already in circulation. In effect, by printing pesos to buy dollars the central bank pays for those dollars by confiscating a smidgen from everyone in the peso-denominated real economy.
I invite you to read this nice article from the IMF which explains “sterilizing capital inflows.” I don’t agree with it completely (it steers the reader around some important issues with artful misdirection), but it explains why printing pesos to buy dollars is inflationary even in the intended- for- public- consumption view of a modern central banker.
What Mark Seecof said. And thanks.
Mike Sproul: I hope you won’t mind, but although I read your stuff about the “Real Bills Doctrine” and even wrote a long response, I’m not going to post it here for fear that our gracious host Tyler Cowen will get annoyed. Let me instead just point out that your theory collapses if banks issue notes without good security, and I put it to you that government banks around the world have frequently done just that (remember the Ostmark?).
(Oh, and I suggest you convert your papers to HTML or PDF because some people don’t have MS-Word and others refuse to open MS-Word files which may contain macro viruses or other malware.)
So much for the real bills doctrine: Zimbabwe issues 100 Billion Dollar banknote.
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